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Buy and Hold – Leasing

​One of the things I love about real estate is besides giving you many different ways to generate income, is it also gives you a lot of opportunities to create wealth.  

What I always like to tell my CPA is, “I want to get rich.  I don’t want to make any money.”  

What that means is that I need to generate income to pay for my lifestyle but it’s really buying and holding and growing a portfolio of properties that grows your wealth. And real estate is perfect because it lends itself to many opportunities to grow your wealth as well as generate income.

With that in mind, let's talk about the buy and hold strategy.

Buy and hold works as followings:  

You find a property, get it under contract and you buy or close on the property.  

You can use conventional financing, especially if it’s a pretty home.  You can use cash or hard money for ugly homes and then refinance after renovation.  

Now, that’s my favorite way to buy rental properties.  I’d like to buy a property.  I might find a property for $65,000.  I might spend $25,000 totally renovating the house.  At which point, maybe the house is worth $140,000.

But rather than just selling it for $140,000, I go ahead and refinance it for let’s say, $110,000.  You generally can’t refinance it for the full retail value, but if you refinance it in my example for $110,000.

Why do that? Because you get all of your $65,000 back, plus the $25,000 you spent on the renovation, and you get to pocket some additional money, maybe $10,000 or more.  

By the way, you didn’t sell the property, you just refinanced it.  So, that money you just pocketed, that profit, that’s essentially tax free.  It’s just a cash out.

​Lease Property to Tenants

Now you can stick a tenant in that property who will pay the mortgage and maybe even generate some cash-flow for you while the property appreciates over time.  
Of course, after you close on the property regardless of how you do, you lease it to a tenant.

By leasing the property, you get some short-term benefits.  

​Short-Term Benefits

​​You get some cash-flow, hopefully.  In some cases, some properties appreciate more and get less cash-flow and other properties appreciate maybe less but get more cash-flows.  You have to look at the total return on investment.

You also will get to take the depreciation of the property, all improvements on the property get to be deducted over 27-and-a-half-years giving you great tax deductions.  Of course, all of the taxes you pay interest repairs, et cetera, all expenses on the property are all tax deductible for the life of the property.
And then of course, the long-term benefits are appreciation.  

In the United States, the average appreciation rate for properties over the last 30 years is around 6%.  And what that means is that if you buy a property, and you hold it, it will obviously go up in value.

​Potential Profits

​​But there’s something kind of interesting about that number and what can happen.  

If you go ahead and find yourself a property, that’s what I call a good deal... you get to buy it for 80% of value.  It’s not unbelievable deal, but it’s a good deal.  

If you look real hard occasionally, you will find those good deals.  So, if you bought a property at 80% of value, and you let that property appreciate, at just 6% a year, something happens after about seven or eight years.  

You will have exceeded the 50% loan to value.  What does that mean?

The property will go up in value each year a little bit and you’ll pay down the loan a little bit, and after about eight years, you’re going to discover that you’ve got 50% equity in that property.  

What if you bought 30 or 40 properties that way?  Wow, 30 or 40 good deals, after seven or eight years, you can actually sell half of them and pay off the other half and own 15 or 20 properties completely loan free.

Free and clear each one generating $1,000, $1,200 maybe, $1,500 a month in rent. This would generate $20,000 or more of passive cash-flow, adjusted for inflation and you still get all of the depreciation and tax benefits for the rest of your life, not a bad deal.

With the buy and hold strategy, the bottom line is that typical profit, $100,000 or more per house.  The catch is you’ve got to hold for 5, 8, 10, 15 years and unlike most renovation and different investing strategies where you’re buying and selling or flipping.

​Still All About Location, Location, Location

​​And all that really matters is what you could buy it for, what you can sell it for.  If you’re buying and holding, it goes down to the classic location, location, location.
You want to buy properties that are in better locations that are going to appreciate more over the time horizon that you hold them.  


​​Of course, along the way, you have to manage your risks.  Basically, all the joys that go along with being a landlord like continuous repairs.  These things can cost a lot at time, and you have to have a little money in reserve to cover the issues and things that come up.

Cash – Wholesaling – Assigning

​One great way to get started in real estate is to buy properties either with cash or by wholesaling and assign them.  The way this works is that an investor – often a bird-dog or a new investor), finds a property and gets it under contract.  

Your acquisition strategies could be none, just get it under contract.

Short-Term Financing

Or you could buy the property using short term financing.  

You can use cash if you have it, you could credit cards if you have several credit cards with credit on them.  You can actually put them together and come up with a certain amount of cash.

You can use hard money.  Hard money is basically money that’s provided by hard money lenders that will loan based on the deal, not based on you or your credit.  

In other words, if you can get something under contract for 65 or 70 cents on the dollar, they will give you a relatively high interest loan in order to buy that property using hard money.  
Or you can use private money.  Private money is simply money that comes from a higher net worth individual that’s willing to again loan you money based on the deal.

​Exit Strategies

​​And then after you get the property under contract, your exit strategies could be to just assign the contract to somebody else.  Give them the contract, let them put their name on the contract in exchange for a fee, or you can do a simultaneous close.  

Simultaneous close hides the underlying terms and transaction.  In other words, you could buy the property in the morning for $110,000 and you can sell it in the afternoon for $150,000 and the person you buy it from never knows that you’re going to sell it again or what price you’re going to sell it for and the person that you sell it to, doesn’t know what you actually bought it for.  
So, that can be done through a simultaneous close.  And then sometimes, you can also flip the property.  Flip just means you buy it.  You hold it for some period of time and then sell it again.  

Sometimes this is needed to season the transaction in the event that the in buyer is getting a loan and they can’t actually get the loan until you’ve owned it for a certain amount of time.

​Recommended "Getting Started" Strategy for New Investors

​​​All of these strategies are recommending getting started strategies for new investors.  

Typical profits anywhere from $500 to $5,000 per deal or 5% to 10% of the after repaired value minus repairs for average priced deals, and the risk are low.  

You can always get out of a contract.  Almost all law that talks about who has to execute a buyer versus a seller is weighted in favor of the buyer.  In other words, it’s very difficult to force somebody to buy a house that they don’t want but it’s very easy to force somebody to sell a house if they put it under contract.
So many, many variations of how this strategy works.  One example I have is I actually had a property a little town called Loga Vista.  I got it under contract for $250,000.  

After I got it under contract and did my due diligence on the deal, I decided I actually didn’t want the property but instead of doing what a lot of people would do, I just canceled my contract and move on, I actually decided, “Well, let’s see if anybody else wants this property.”  

I offered the property to a bunch of other people and somebody else, it turns out, came up behind me and said that they wanted to offer $260,000 for the property.  

What did I do?  I basically went to them and I said, “Okay.  Tell you what, give me $10,000 and I will give you my contract and allow you to buy the property for $250,000.”  

I made $10,000 in that example for not canceling a contract.

Rehabbing Fix and Flip

​Rehabbing: Fix and Flip

​Of all the major strategies in property investment, renovating, rehab and fix and flip is also one of the riskiest ones. But it’s the one that all new investors want to do because they see this every time they watch TV reality shows.

These shows let you believe it's easy to make big money buying and selling and renovating properties.  But it is like I said, one of the most risky strategies you can use.

Here’s how it works, you find a property, get the property under contract and then you buy the property.  

You can use cash if you have cash.  You can use hard money.  This is money given by a lender who will loan you money based on the deal.  Sometimes you can even use conventional financing.  
Although it’s unusual because usually you don’t have time to get a conventional loan than if it’s a fixer-upper.  Once you buy the property, you renovate it as needed.

​Resell for Profit

​​After renovating it, you resell it for a profit and your typical profit on an average house would be $15,000 to $20,000 or 15% of the after repaired value.

Now, the risk.  

Well, renovation, managing the renovation, managing your costs and managing the market.  

The market can change and the house may not be worth as much as you estimated when you started the project.  Those two factors alone can cause your profit to swing plus or minus 30%.  

The question I have for all the new investors is, can anybody tell me what 15%, minus 30% is?  That’s minus 15%.

So, yes.  That’s why this is a very risky strategy.  

Very, very often, new investors overpay for properties and don’t manage the renovations, and missed the market, and end up losing money, sometimes a lot of money when they do these projects and that’s why, of all the strategy we use, this is by far the riskiest one, but it is a very profitable strategy if done right.  

It’s a high-risk kind of reward strategy.  I do many renovation projects.  I probably do, oh gosh, maybe two or three renovations a month even.

In fact, every year, I would like to tell, I do at least one cat house a year.  

Cat house is a house where the owners have maybe hundreds of cats and we’d go into one of these houses and if you can stand the smell and get rid of all the cats, you can usually get really good deals on these houses and fix them up and sell them and make a profit.  

That’s just one of dozens and dozens of examples of the kinds of houses that we buy for renovation projects.

Buying Subject To

​One of the Most Powerful Techniques in Real Estate

​This is probably my favorite strategy in property investment.

Buying "Subject-To" or "Sub-To", as it’s known in the business is one of the most powerful techniques in all of real estate.  

It’s where you can buy a property for as little as zero down and zero out-of-pocket.  And basically, the way it works is this, you are making an agreement, a non-binding agreement to make somebody else’s loan payments going forward in exchange for the deed.  

So, it’s that simple.  

It’s a great way to pick up rentals, renovations, homesteads, etc.

Always Close at a Title Company

​​Now, the details can get a little complicated and in Texas, because the Texas House Bill 2207. That bill says that you have to either get the consent of the lender to buy a property subject to, which you’re not going to get. Or complete the transaction at a titled company with titled insurance which is easy to do and highly recommended.  

To do it legally in Texas, you do want to close these things at a titled company.  But it’s a great way to buy property.  Usually, when you see these late-night commercials, it says, “I buy properties with no money out-of-pocket, zero down, etc.”  Usually they’re talking about "Subject-To."  

For anybody who is reluctant or doesn’t quite get it or understand it, I think the best way to explain it is this...

If you own a home, every month you write out a check and you put it in an envelope and you mail it off and the lender gets the check and they open it up and they say, “Oh, money” and they cash it.  

And the question to ask is, does the lender care who wrote the check?  In other words, do they care if you mailed the mortgage payment?  Do they care if your father mailed the mortgage payment?  Do they care if I mailed the mortgage payment?  

And the answer is, no.  All the lender looks at is, to see that somebody made the mortgage payment.  As long as those mortgage payments keep getting made month after month after month, the lender is very happy and they will continue to collect those payments indefinitely.  

When you buy something "Subject-To", you’re basically just telling the owner, “Look, I will make your mortgage payments going forward if you agree to deed the property over to me so that I own it.”

​For Long-Term Holds

​​​Now, if you’re buying properties that are going to be rental properties or properties that you’re going to hold for a long term and resell maybe with wraparound mortgages for example, you want to look for low, fixed interest rate loans.  
Low interest rates, you want to make sure there’s no balloon payments on the loans.  But I also love to buy properties that are short term buys.  In other words, I like to buy renovation projects "Subject To."  

Why not use money that’s already on the home, the financing is already in place?

For ​Short-Term Holds

​​​​For a short-term "Sub-To" deals, you want to look for no prepayment penalties but really nothing else matters.  

In other words, it doesn’t matter what the interest rate is.  I’m only going to have it for a short amount of time anyway and it’s going to always be a lot cheaper than going and getting a new loan.

A little example of a deal like this, I did a little house on a street called Gernsey.  

Here was the deal - four guys each renting this house and the four tenants were each paying $400 a month rent.  In other words, the house is generating $1,600 a month rent.  

Now, the homeowner was collecting that $1,600 a month and pocketing it and not paying the mortgage payment.  It turns out, the mortgage payment was only $1,100 a month.  The home was going into foreclosure.  Now, the home is worth $150,000.  They only owed a $110,000 on the note.  There’s $40,000 in equity but because the homeowner stopped paying the mortgage, the house was about to be foreclosed on.

I went to the homeowner and I said, “Look, I can save your credit and I can stop this foreclosure if you simply deed the property over to me.”  

She deeded me the property and I caught up the payments which cost me about $4,000.  

For $4,000, what did I get?  

For $4,000, I got a $150,000 house that’s generating $1,600 a month rent.  I’m paying the $1,100 mortgage payments so I’m getting $500 a month in a positive cash-flow.

And I get $40,000 of instant equity because I only owe $110,000. Or I should say I’m only paying the mortgage on somebody else’s loan of $110,000 on that house and that house will just keep going up and up and up in value.

All the while I keep collecting that $500 a month positive cash-flow until I finally someday want to sell it and take the full profit out of it.

That’s an example of buying a property "Subject-To."  

My question to any new investor that’s curious about this, I would say, “Would you take that deal?  Would you take 10 of those deals?  Would you take 20 of those deals?” you know.  Get enough of those deals under your belt and essentially, you’re done.